Energy levies and a greener tax system

We designed tax increases aimed at avoiding serious effects on the competitive position of Dutch firms, or very negative effects on real incomes for private households.

The research is part of CPB's new Long Term Study 'Economy and its Physical Surroundings.' We designed two variants: one in which both the existing small-user energy tax and the existing all-user energy tax are doubled, and one in which the small-user energy tax is tripled for very small use (mainly households). Both variants increase energy tax revenues by 3½ billion guilders. The revenues are recycled through decreases in social security contributions (firms) and income tax (households). We assume that employees do not demand higher wages in response to the tax increases (they consider the revenue recycling as enough compensation).

Both variants have an effect of minus 2% on Dutch energy use and CO2 emissions in the long term (in 2010 and 2020). The largest effect involves households: about minus 4% in the first variant 1 and minus 7% in the second. The total CO2 effect amounts to between 4 and 5 megaton. The effect on employment is zero for both variants. The volume of private consumption goes up by 0.1%. Dutch GDP is the same with or without the tax shifts. The effects on production per economic sector vary between -0.4 and +0.4%. The effects on real household income are between -½ and +½% depending on income levels and household types. These effects apply to the average household in each group: for individual households the effects can be larger. We looked also at the possibility of creating exemptions for firms and households that invest in energy saving.

However, attempts to maximize the effect by creating exemptions only for marginal investments will meet serious difficulties because the government does not have enough information to identify marginal investments. If ½ billion out of the 3½ billion guilders in tax revenues is used for exemptions instead of recycling, the economic consequences are very limited, and the CO2 effect goes up from between 4 and 5 megaton, to between 7 and 10 megaton. It appears possible to increase existing energy taxes without causing serious economic effects, provided that the energy tax increase concern mainly small users; that revenues are (almost) fully recycled in other taxes; and that no additional wage increases are demanded.